Coming off a wobbly 2016 – a year when biopharma dealmaking could be viewed as a glass half empty or half full – the direction of the industry this year could hinge on several macro factors, including drug pricing and the ability to improve R&D productivity beyond business development. A review of 2016 data from Cortellis Deals Intelligence (CDI) presented in conjunction with the 35th Annual J.P. Morgan (JPM) Healthcare Conference showed a heartening increase in biopharma deals across companies and technologies but an ominous falloff in dollars compared to the previous year – diverging trends that are unsustainable over the long haul.
Using CDI, Laura Vitez, life sciences deals analyst and manager of analytic propositions, observed at the start of her presentation that JPM attendees could have reason to celebrate at the outset of 2017, but could just as easily justify a cautionary outlook. As opposed to the previous three years, where indicators moved steadily upward, such was not the case in 2016.
“It wasn’t an awful year, and there were still places where our indicators were up,” Vitez said, “but there were also a number of important numbers that were down.”
The good news was that more than 4,000 deals were made across the life sciences sector, with licenses and joint ventures representing approximately 29 percent and M&A 13 percent. Other types of transactions included grant, equity and royalty buyouts and related financings, at 20 percent of the total, as well as smaller proportions of deals in categories such as supply and distribution, contract services, research and asset acquisition.
In total, the number of 2016 biopharma deals eclipsed the previous year, by 130, but aggregate dollars were down 40 percent from 2015. Where did they go?
In short, “the megamerger party ended,” Vitez said, noting that the handful of transactions upward of $40 billion that occurred over the previous two years were absent in 2016. She blamed the U.S. Treasury action to end inversions for part of that shortfall, including the scuttling of a planned merger between New York-based Pfizer Inc. and Allergan plc, of Dublin. (See BioWorld Today, April 7, 2016.) The upside was that some biopharmas that successfully inverted their taxes in previous years began spending those “savings” on M&A – notably Allergan, which inked a string of 2016 deals that started days after walking away from Pfizer. (See BioWorld Today, April 8, 2016, April 25, 2016, Sept. 15, 2016, Sept. 21, 2016, Oct. 4, 2016, and Dec. 21, 2016.)
Pfizer Inc.’s $14 billion acquisition of Medivation Inc. – the largest biopharma M&A of the year – actually represented an outlier for 2016, resulting from an auction process that involved approximately a dozen biopharmas before the deal was sealed, Vitez said. (See BioWorld Today, Aug. 23, 2016.)
Although the fourth quarter was the slowest period of the year – potentially, an “uncomfortable” omen for 2017 – Vitez attributed a certain amount of inactivity to the desire by big biopharmas to disclose their matinee deals at JPM. Several large M&As were revealed Monday morning before the first presenter took the stage in the Grand Ballroom at the Westin St. Francis.
And a deeper look at the 4Q numbers showed that November, when the world collectively waited and then debated the outcome of the U.S. presidential election, was the slimmest dealmaking period of all. With the results of that election and the politically charged Brexit vote now known quantities, for better or for worse, “businesses can plan and move forward accordingly,” Vitez said. “For that reason alone, we may see some big M&As return” in 2017.
‘$70B on Products That Will Never Reach Patients’
In terms of licensing, CDI data tallied 21 deals with more than $1 billion in biodollars, including the first appearance of Nestlé Health Sciences, as part of its microbiome deal with Seres Therapeutics Inc., and three deals in which London-based AstraZeneca plc appeared on the sell side as it tweaked its pipeline. “AstraZeneca is really working to focus on its core areas and has been willing to sell off anything it cannot exploit,” Vitez said, commending the “courageous” strategy. “Many pharmas talk about this strategy; it’s interesting to see AstraZeneca doing it, repeatedly,” she added.
Another licensing trend that appears to be taking hold is the propensity to go earlier and provide more up-front dollars. Nearly half of the top 2016 up-front biopharma licensing deals involved discovery-stage assets, and the down payments were larger – 20 exceeded $100 million – perhaps suggesting accelerating innovation on the sell side and the need to gain a toehold in that innovation on the buy side, according to Vitez.
Not surprisingly, the licensing deals that companies pursued in 2016 were correlated to their strategic business goals. Some biopharmas, such as Johnson & Johnson, Roche Holdings AG and Merck & Co. Inc., were highly invested in research-only deals. Other big biopharmas, such as Allergan, grew their development pipelines but not their research capabilities.
The business development model of drug development is increasingly attractive, but it can be taken only so far, cautioned Jamie Munro, global practice leader for portfolio and licensing at Clarivate Analytics (formerly the IP & Science Business of Thomson Reuters). Last year also was notable for a dramatic decline in FDA new drug approvals, at just 22. Although business development deals underpinned half of those approvals, “even when BD is factored in, large pharma accounted for less than 10 of the approved [new molecular entities],” he said, “so the trend of smaller and medium biotech accounting for more than half of approvals continued.”
Moreover, six new drug approvals were garnered by three companies – Abbvie, Merck and Eli Lilly and Co. – so most big biopharmas had no new drug approvals last year, Munro pointed out. Although the drop-off wasn’t inherently linked to a lack of innovation – some drug approvals were accelerated into 2015, and 2016 saw a spike in complete response letters related to manufacturing issues – the result was not a pretty picture for big biopharma. Most companies were dependent on legacy products for revenues, with the average 2015 revenue from products approved in the previous five years collectively representing less than $3 billion in sales, or about 12 percent of revenues.
Taken as a whole, the basket of “innovative” big pharmas generated $104 billion in revenues from products approved over the previous 10 years but spent approximately $75 billion on R&D, Munro pointed out.
“If we take that $75 billion as representative of large pharma spend and assume a success rate of 6 percent, which is not unreasonable, that means that on average $70 billion is spent on products that will never reach patients,” representing the cost of failure, Munro pointed out. Companies can employ a number of strategies to reduce that number, for example by investing in assets more likely to improve patient health, boosting productivity by failing faster and more cost-effectively and restructuring to reduce costs. But business development has become a principal solution to the productivity problem: licensing to fill pipeline gaps and conducting M&A to drive development synergies.
One sector where business development is, so far, working is immuno-oncology (I-O), where pipeline assets are maturing, with several now launched and continued R&D momentum. In 2016, those trends translated into 17 I-O deals that exceeded 2015 in total size. Many were at the discovery or preclinical stage, suggesting confidence in the long-term outlook of I-O notwithstanding the dearth of clinical-stage assets.
“Although PD-1 and PD-L1 are emerging as the targets of choice based on their progressions, there are many other targets in the I-O pipeline,” Munro pointed out. “The area is still evolving, with both the winners and losers to be decided based on target and use of combinations.”
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